Covered Bonds

While markets on the continent were closed for business on Monday due to public holidays, syndicate bankers in London were planning a busy week ahead. With a broadly positive reaction to European Central Bank president Mario Draghi’s Thursday speech seen across credit markets into the end of last week, conditions remain strong for primary issuance. On Friday the iTraxx Senior index closed 8bp tighter to a new post-2008 low of 60bp. The pipeline could include deals from Westpac New Zealand and Caisse Centrale Desjardins du Quebec.

Veneto Banca has issued its second RMBS in as many months, while Banca Sella was set to price its first RMBS deal since 2005 on Friday. The short dated single A rated deals, that offered a compelling triple digit spread, will give covered bonds a run for their money for investors that understand the risk.

Two of the strongest RMBS platforms in the European securitization market hit the market this week, and showed investors are still eager to grab the highest quality paper.

Moody’s released its quarterly treasure trove of covered bond rating trend analysis in ‘Global Covered Bonds Monitoring Overview: Q4 2013’ this week. The agency identified a widespread increase in timely payment indicators (TPIs) for covered bond programmes in countries with a sovereign rating of A1 and below as the key trend.

Covered bond secondary markets opened on a much firmer footing on Friday, with dealers and clients singling out higher yielding weaker credits, particularly in the periphery, where offers are hard to find. The move came after Thursday’s stimulus package from the European Central Bank, and after Standard and Poor’s upgraded several Spanish banks.

The widely anticipated public sector-backed Pfandbrief from Dexia Kommunalbank on Tuesday had been expected to go well, given the juicy spread that was expected. But the level of oversubscription proved a surprise and was the highest of any German deal this year — even putting competing issuance from Portugal into the shade.

OP Mortgage Bank on Wednesday returned for the second time this year to issue a €1bn five year covered bond. Despite pricing at the tightest spread for any Finnish transaction in the last five years and with a negligible new issue premium, it still attracted a robust level of oversubscription.

Covered bond volumes soared this week as borrowers — fearing increased volatility and execution risk — priced six deals before the European Central Bank meeting. But they need not have worried as the ECB’s action, which will constrict issuance, is likely to cause spreads to tighten so that execution risks will remain at bay for a lot longer.

Banco Santander Totta surprised the market on Tuesday, announcing a mandate and opening books for its second deal this year. Though the transaction had nothing like the oversubscription seen in previous peripheral issuance, the quality of investors in the book was high.

Danske Bank’s first covered bond of the year offered an attractive spread relative to its Nordic peers, making it a straightforward sell for its lead managers. But even so, the final pricing level was just one third of Danske’s differential against top tier Swedish covered bonds issued a year ago.

With rate cuts and targeted asset purchases already priced into markets, bankers fear the European Central Bank will under-deliver on promises of market stimulus at Thursday’s meeting and trigger a fixed income sell-off. However, this will present a buying opportunity for covered bond investors, bankers told The Cover. Commonwealth Bank of Australia has issued a five year dollar benchmark.

The European Mortgage Federation - European Covered Bond Council (EMF-ECBC) has promoted Luca Bertalot to secretary general of the joint association with immediate effect following the departure of Annik Lambert.